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Why consultants can’t pick winners

A research paper that concludes that the funds recommended to institutional investors by investment consultant do not add value, has won the Commonfund Prize, awarded for original research relevant to endowment and foundation asset management. The paper, by academics at Saïd Business School, Oxford University and University of Connecticut School of Business, found that there is “no evidence that these recommendations add value, suggesting that the search for winners, encouraged and guided by investment consultants, is fruitless.”

The winning paper, Picking winners? Investment Consultants’ Recommendations of Fund Managers, by Tim Jenkinson, Howard Jones, (Saïd Business School, Oxford University) and Jose Martinez (University of Connecticut School of Business) analyses the factors that drive consultants’ recommendations of US actively managed equity funds, and the impact these recommendations have on flows, as well as how well the recommended funds perform.

The authors find that investment consultants’ recommendations of funds are driven largely by soft factors, rather than the funds’ past performance, and that their recommendations have a very significant effect on fund flows. But there is no evidence that these recommendations add value.

The Commonfund Prize is awarded annually by the Commonfund Institute in collaboration with the Newton Centre for Endowment Asset Management at Cambridge Judge Business School. The winning paper carries a $10,000 prize.

Endowment and foundation funds are most commonly seen in the charity, education and healthcare sectors. Although regular withdrawals from the invested capital are needed to meet on-going operational costs, such funds are typically characterised by a perpetual time horizon.

First awarded in 1996, the Commonfund Prize aims to recognise original research and to set the standard for research excellence and innovation in this area of asset management.

There were two papers chosen as runners-up in the category of highly commended:

Laura Starks (University of Texas at Austin) and Richard Sias and Luke DeVault (University of Arizona) for  Who are the Sentiment Traders. Evidence from the Cross-Section of Stock Returns and Demand

Neal Stoughton, Georg Cejnek, and Richard Franz (Vienna University of Economics and Business) for  An Integrated Model of University Endowments

The judging panel consists of David Chambers, the Academic Director of the Newton Centre for Endowment Asset Management and Reader at Cambridge Judge Business School; Elroy Dimson, the Centre’s Chairman and Professor of Finance at Cambridge Judge Business School; and William Goetzmann, Professor of Finance and Director of the International Center for Finance at the Yale School of Management.